German mortgage banks counter criticism from ECB supervision
The Association of German Pfandbrief Banks (Verband deutscher Pfandbriefbanken – VDP) warns against adopting Anglo-Saxon appraisal practices for the German real estate market. "That would lead to extreme fluctuations," says VDP President Gero Bergmann. Germany has fared better than most international markets for many years with the method of appraisal smoothing that is customary in this country.
Bergmann, who is also a full-time board member of BayernLB, highlights the benefits of the inertia of the German market. "The German valuation system helped us get through the 2008 crisis well," he said, urging the European Central Bank (ECB) to align itself with the German system.
"Is it really good, and does it do justice to the market under consideration, that prices in London or elsewhere shoot up and then sharply decline again?" Bergmann states a rhetorical question. On the other hand, the ECB seems to prefer the largest possible amplitude. "Sometimes I think the ECB is genuinely surprised that the real estate market does not follow the same dynamics as the capital market."
No "blind spot"
Bergmann rejected the accusation that the valuation of commercial real estate is a blind spot in bank balance sheets. The ECB banking supervision has taken up the issue because it is concerned that the balance sheets do not correctly reflect the price decline due to the abrupt interest rate turnaround. "Of course, there is nervousness in the market," he admitted. But the valuations are continuously adjusted and flow into the calculation of capital requirements.
Despite the price decline due to the historic rise in interest rates, the loan-to-value ratios of German real estate financiers still remain overall below 60%, emphasized Bergmann: "The gaps between the loan amount and the property value are still comfortable." It is the collapse of transactions that constitutes a challenge to banks. However, Bergmann does not consider it effective to set prices as low as possible in response: "It is not the right way to assume risks that you don't even know if they exist."
Bergmann does not anticipate a rapid market recovery: "I expect that by mid-2024, we will reach a point where it will not go down further." Towards the end of the second half of the year, he expects an initial slight interest rate reduction that will restart the transaction market.
